Good day, ladies and gentlemen, and welcome to the Q2 2014 Lincoln Educational Services Earnings Conference Call. My name is Latoya and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Shaun McAlmont, Chief Executive Officer. Please, proceed, sir.

Thanks, Latoya. Good morning, everyone. Joining me in the room today is Scott Shaw, our President and Chief Operating Officer; and Cesar Ribeiro, our Chief Financial Officer. Let me begin this morning by reading the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements in this presentation concerning Lincoln Educational Services Corporation's future prospects are forward-looking statements that involve risks and uncertainties. There can be no assurance that future results will be achieved, and actual results may differ materially from forecasts, estimates and summary information contained in this earnings release. Important factors that could cause actual results to differ materially are included but not limited to those listed in Lincoln's annual report on Form 10-K for the year ended December 31, 2013, and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement. This morning, I'll provide some opening comments, and Scott will provide an overview of our company's operations. Cesar will then provide a financial review of the quarter and our third quarter forecast. We'll then take your questions. It's difficult to discuss our company's second quarter performance without first acknowledging the environment in which we are currently operating. And as I mentioned in our press release, recent events in our sector, including the closing and potential sale of one of our competitors, is unprecedented and has compounded the negative publicity in our industry, and it's also caused a major disruption for our company since we operate many of the same geographies and similar programs as those schools. Since our last call in the mere span of 90 days, there has been, literally, chaos. As we attempt to recruit students, motivate employees and attract investors, we're feeling the impact of negative news stories, political actions…

Good morning, and thank you, Shaun. I'll spend my time sharing with you the progress that we've made in the second quarter as well as highlight changes and opportunities that we see for the remainder of the year. In short, we continue to achieve improvement in all of our outcomes while we continue to wrestle with the choppy economic and industry environment. We remain committed to sustaining our strong regulatory record while we find new ways to attract and educate students in our core fields of study. The most encouraging trend that I continue to witness is the strong demand by industry for our graduates today and for the foreseeable future as baby boomers increasingly retire from the workforce. However, in order to fully capitalize on this demand, we need to better educate prospective students about the industry need and opportunities for long-term employment and career development. And I see ourselves increasingly doing this in partnership with employers and industry organizations. Our attention is focused on growing our student population by both increasing the number of students entering our schools and increasing our retention rates. During the second quarter, we achieved growth in both of these goals, and for the first time in 17 quarters, we achieved positive start growth for 2 consecutive quarters. We've placed a lot of attention on improving our admissions process by utilizing new technologies to educate and engage prospective students. Also, we are enhancing our online applicant portal and making additional changes to improve a student's experience during the enrollment process. Finally, we continuously train our admissions representatives on how to provide the best customer service possible. These are just some of the actions taken that resulted in our enrollments for the quarter increasing by almost 4%. Unfortunately, while we made progress in converting more…

Thank you, Scott. Good morning, everyone. As we disclosed in our press release early this morning, student starts increased 0.6% for the second quarter of 2004 as compared to the second quarter of 2013. As we previously mentioned, we began the first quarter of 2014 with approximately 1,800 less students than we had on January 1, 2013. This [indiscernible] average population declining 4.8% for the second quarter of 2014, which resulted in revenue declining by 5.6%, or approximately $4.6 million, as compared to the second quarter of 2013. In addition, the decrease in revenue for the quarter was also somewhat impacted as a result of a decrease of 0.9% in average revenue per student over the second quarter of 2013 due to an increase in institutional scholarships in the first half of 2014. Average revenue per student for the second quarter of 2014 was $5,590 versus $5,638 for the second quarter of 2013. The decrease in student population during 2014 also impacted our capacity utilization, which decreased to 34.5% for the second quarter of 2014 from 35.8% in the second quarter of 2013. The decrease in capacity utilization produced significant negative leverage as our operating margin decreased to negative 13% for the quarter from a negative 12.1% for the second quarter of 2013. Other key highlights for the quarter included loss per share from continuing operations was $0.51 for the second quarter of 2013 as compared to a loss per share from continuing operations of $0.30 for the second quarter of 2013. For the second quarter of 2014, we were not able to avail ourselves to a benefit for income taxes as a result of the valuation allowance in our deferred tax assets. The impact of the valuation allowance on a comparable basis was $0.21 per share for the second…

[Operator Instructions] Your first question comes from Alex Paris with Barrington Research.

This is actually Joe filling in for Alex. Shaun, you opened kind of with some strong language regarding COCO and kind of the impact that's had on the industry as well as your business. And you were kind of talking about their short-run impact. I'm just curious of your thoughts, and if you look kind of the long-run view here with kind of a supply-demand equation with potentially COCO's campuses closing down, I mean, could this -- do you view this as a benefit in the long run?

That's a good question, Joe. It's something that we've been assessing here, as you can imagine, over the last few weeks. It really is unprecedented what we're seeing right now in the sector and what's been happening there in particular. And I think that we're all trying to figure it out and figure out what the real impact is on us short term. We look a lot like that company. We sit in the same geographies, and there's a lot of uncertainty, fear and confusion surrounding all of that in the short term. I think that -- just to relate it to some of our other comments, it's why we are really fortifying our company, ensuring that our outcomes are where they need to be, keeping our legal exposure low, et cetera, and maintaining that strong foundation we've had over the last few years. With that said, we also are shoring ourselves up financially as well, making sure that our balance sheet is strong because there are 2 elements here, as you mentioned. There's a short-term uncertainty. We don't know how it's really going to affect the second half of the year, but we're assuming, based on our forecast, that we can withstand it, but it will be tough. And then, we do think that there's long-term opportunity. I mean, any time that the market changes could be so dramatic in terms of consolidation where it also impacts us directly in terms of geographies and programs, we think that there is long-term benefit when the market adjusts. The only question for us is when all of that happens, and that we can't predict. But we do think that the short-term strain will turn into long-term opportunity. And I'll let Scott or Cesar tag on to that as well.

Yes, I agree 100% with what Shaun's saying. I guess, we're still unclear what's really happening to COCO. People are talking about it as if it's a done deal. And it seems as if there's still uncertainty as to actually what's going to happen with the campuses. But we do view it as a long-term opportunity for us to, frankly, strengthen our position in certain markets.

Maybe in the short run, just talk to me in what -- I'm assuming parents are coming to you, students are coming to you from COCO or from -- and other competitors. How are you explaining your value proposition, your messaging? Because you guys are a clean operator. You have a regulatory free track record. Are you doing anything differently or to communicate that to potentially students coming from WyoTech or anybody else?

I wouldn't say that we're communicating any differently. I mean, as you know, Joe, the admissions process has gone through a number of changes over the last little while. The disclosures are pretty evident on the websites, and we sort of communicate with students in a very clear way. We also shop our processes to make sure that quality standards and regulatory standards are being met. So we really haven't changed our approach or our language. I think all we really have done is equipped our schools with the tools they need to communicate with a student that's coming in that may have already gone to school, or utilize a certain amount of their federal funding, or they might be coming in fearful about transferability of the credits that they've already achieved and those kinds of things. And so we've just given them guidance on how to deal with that, but it's really how you deal with any type of transfer student. So we haven't done anything in particular yet. And yes, we have had students come to our schools from some schools that are going through closure or other types of hardship. But I can't say that we've done anything outside of that.

Okay. And one last question and I'll jump back in queue. And this is kind of a modeling guidance question. If based on everything you said, your second half expectations, you expect starts to be down 1% to 3%. If I model in your Q3 expectations of starts down 8% to 10%, mathematically, you could make a -- you could see flat to positive growth in Q4. Is that wrong?

It's not wrong. I'll turn it over to Cesar. Yes, we said 1% to 3% down for the year. And we do expect that Q4, I mean, just really based on the comps, isn't going to be down dramatically.

You would be correct. Right now, we're expecting Q4 to still be positive for the year although slightly on easier comps. But yes, the guidance is 1% to 3% down for the year.

Your next question comes from Jeff Silber with BMO Capital Markets.

In your prepared remarks, you talked about the improving economy helping your placement rates. I'm just curious if you think that might be having an adverse impact on your enrollment ensure [ph] rates? I know this was an issue for the company last cycle, and I'm wondering if it's happening again now?

Yes, I think we're seeing that, Jeff. This is Shaun, and I'll let Scott finish up. But yes, I think that it is definitely benefiting placement, and I think that it provides a little bit of a headwind in admissions. And students are constantly making the decision. I think this falls under affordability for us, whether a student doesn't want to take out some level of debt or their family doesn't want to take on debt, or the student doesn't want to necessarily make a monthly payment, or they make a decision to work versus going to school, that all falls under accountability -- I'm sorry, affordability for us. And so we're seeing that headwind right now. I think for us, knowing that, that cycle has shifted a little bit in terms of employment rate across the country, one of the things that we are essentially strategizing for the future involves some of the points we mentioned in the prepared remarks, making the programs not only more affordable but also more convenient so students can continue to work part time and then also promoting our evening programs as well to offset some of that.

Yes, I think that, as you said, it is a typical cycle that as the economy improves, people have other options and maybe less inclined to return to school. We're not seeing it being raised as a direct reason why people aren't coming to us at this time. We did grow our enrollments in the second quarter. But it's only natural that we will still be facing some headwinds, as Shaun said, as that option becomes more available to people. And we just have to get more creative and partner with more individuals, especially industries that are really in desperate need for people to help bridge that gap and really educate, frankly, more people about what the opportunities are that do exist out there.

Okay. You also talked about your cost rationalization in the back half of the year. I know this is a sensitive issue, but has anything been announced? I'm just curious which specific line item on the income statement that will affect.

I mean, we're continually looking at this. And so basically, obviously, our largest cost ends up being people. So whenever our populations are down, we're constantly rationalizing our people force so that could be in faculty or could be in administrative levels. It really varies campus by campus.

So with that said, we're looking at a couple of things structurally. And I think most of those will fall within typical SG&A lines.

Yes, there's obviously some instructor, faculty. But for the most part it, would be within SG&A.

[Operator Instructions] Your next question comes from Trace Urdan with Wells Fargo Securities.

Shaun, I don't want to put words in your mouth, but it sure sounded like from your opening statement that, given the lack of visibility in the sector and I think the anxiety that you described in some form on the part of lenders, that it would be unlikely that you guys would be a bidder on the Corinthian assets that are on the market right now. Is that a fair statement?

I didn't necessarily say that. I mean -- I'll just tell you this, Trace. I mean, historically, we've always looked at opportunities that have come our way, and if it makes sense and adds value to the company, we would look at it. We can never really comment on hypotheticals. And as Scott said, we're not even sure what's going on over there. So it's just really impossible to even comment on it right now.

Okay. I wonder if I could just -- because investors are so focused on the lending side of the equation right now and you did make those comments about the lending environment, are you experiencing any pressure from your lenders to change the terms of your agreements in any way?

No. As you might recall, we did an amendment back in December of last year, and we amended it then. We had to make an amendment because of -- we had to provide a valuation allowance in our deferred tax assets and that would have violated some of our covenants. So we made all those amendments, and our credit agreement today, we're in compliance with all debt covenants, and there's really no pressure on that side. With that said, we do see these are opportunistic times. We have a lot of real estate, and we are choosing to monetize some of that real estate and put some cash on the balance sheet.

Okay, great. And then, again, just from the inoculation standpoint, could you guys make a comment based on your current projections for where you think you'll end the year? Sort of how comfortable you are that you're going to be above 1.5% in your financial responsibility ratio?

We are not commenting whether or not -- where we're going to be at the end of the year, whether we're going to about 1.5% or not. I can assure you that we would certainly be about 1%. But it's still 6.5 months to go and who knows what can happen. So it's too early to comment on that.

There are no further questions in the queue. I would now like to turn the call over to Mr. McAlmont.

Okay. Thank you, Latoya. So to the listeners, as you can see, we're focused and have been very busy on executing our initiatives, which continue to essentially better position us in this time of uncertainty. We have a strong foundation of the company, and we've had a strategy that we feel will allow us to compete in a very unique segment of education and training. We also have a long-term strategy to position Lincoln as a market leader in diversified career training. We believe strongly in vocational training and the viability that these careers make on people's lives, and we'll drive our company toward that strategy long term. Thanks for joining us, and we look forward to updating you on our third quarter results in October.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect. Have a wonderful day.